Manufacturers: Are you Prepared for EU Taxonomy Sustainability Reporting Requirements?

Key Takeaways:

• The EU Taxonomy (and new CSRD requirements) mandate corporate sustainability reporting on financial and operational activities
• Nearly 50,000 companies – including US-based manufacturers – will be required to submit ESG reports based on 2024 data
• Learn how manufacturers can establish a carbon baseline and gather the data required for CO2e reporting

The Full Article: 

The European Green Deal provides policy measures designed to make Europe the first climate-neutral continent by 2050. To spur businesses to meet these greenhouse gas (GHG) emissions goals, the European Union (EU) is requiring corporations to provide new levels of transparency through mandated sustainability reporting.

Successful manufacturers are using the EU Taxonomy and other sustainability reporting and disclosure tools to prioritize efforts to reduce the carbon footprint throughout their supply chain, outline sustainability plans, and highlight their green manufacturing achievements as part of their ESG strategies.

Read the following sections to learn more about EU Taxonomy requirements and how manufacturers are addressing reporting mandates:

1. What is the EU Taxonomy?
2. What are CSRD sustainability reporting requirements?
3. How can manufacturers meet EU Taxonomy regulations?
4. How do you measure emissions for sustainable disclosure requirements?
5. Keys to sustainable manufacturing and ESG reporting

1) What is the EU Taxonomy?

The EU Taxonomy is supporting the transition to a carbon-neutral economy by providing transparency regarding economic (business) activities that most contribute to meeting the EU’s regulatory environmental objectives. This includes a classification system for businesses to disclose which of their activities/operations – or the economic activities they invest in – are “environmentally sustainable.” The EU also requires organizations to report their progress toward meeting EU sustainability objectives to address climate change.

In other words, the EU Taxonomy serves as a green classification system – and a corporate sustainability scorecard – that investors and potential customers can use to see a business’s progress toward meeting the EU’s climate goals. The EU Taxonomy regulation also provides the first common framework to compare environmental, social, and governance (ESG) data across multiple companies. By classifying environmentally sustainable actions, the EU Taxonomy is designed to improve sustainable investment, create security for investors, and motivate companies to be more sustainable.

Manufacturers, for example, that are showing measurable reductions in their environmental impact may attract ESG-focused investors. Alternatively, companies that aren’t reducing their carbon footprint could face scrutiny from customers, investors, and other market influencers.

The Taxonomy is part of a suite of EU regulations to mandate corporate sustainability reporting on financial and operational activities. Specifically, the EU Taxonomy is aligned with the current Sustainable Finance Disclosure Regulation (SFDR), which focuses on financial reporting. The Taxonomy also supports the Corporate Sustainability Reporting Directive (CSRD), which will replace the SFDR in 2024.

2) What are CSRD Sustainability Reporting Requirements?

The CSRD is the European Commission’s first common reporting framework focused on non-financial ESG data. This CSRD reporting requires companies to disclose how sustainability issues affect their organizations (“impacts inward”) and the overall environment (“impacts outward”).

Compared to the SFDR, the CSRD more than quadruples the number of companies required to report on sustainability. Nearly 50,000 companies must submit their report aligning with the CSRD. The expected compliance timeline depends on whether companies already fall into the scope of the NFRD. If they do, they are expected to publish reports in 2025 on the financial year 2024. If companies do not, CSRD compliance is delayed by one year (2025). The forthcoming CSRD reporting requirements apply to:

1. Large companies (listed and non-listed) as defined in the Accounting Directive (i.e., a company with at least two of the following criteria:  250 or more employees; minimum of €40 million turnover in the EU; a balance sheet of at least €20 million)
2. All companies in EU-regulated markets
3. Non-European companies with a net turnover of €150 million and one or more subsidiaries or branches in this region

3) How Can Manufacturers Meet EU Taxonomy Regulations?

A “substantial contribution” to climate change mitigation signals that a company’s sustainability performance levels align with European Green Deal climate neutrality goals. And that a manufacturer’s ESG actions play a role in limiting global warming to a 1.5 degrees Celsius increase.

To meet the EU’s “environmentally sustainable” definition, a company’s economic activity must comply with minimum social safeguards. And it must also show how its actions are contributing substantially to at least one of the EU’s six environmental objectives while not providing “significant harm” to other objectives:

1. Climate change mitigation
2. Transition to a circular economy
3. Climate change adaptation
4. Sustainable use and protection of water and marine resources
5. Pollution prevention and control
6. Protection of healthy ecosystems

Listen to our podcast for tips on competing under the EU Taxonomy for sustainable activities.

4) How do you Measure Emissions for Sustainable Disclosure Requirements?

In addition to the European Commission, multiple government entities are also developing their own sustainable disclosure requirements, including:  Canada, China, Mexico, Russia, and the United Kingdom (Green Finance Strategy).

Sustainable reporting is also critical in addressing the EU Carbon Border Adjustment Mechanism (CBAM), which begins in October 2023. Read our blog that provides manufacturers with tips to prepare for CBAM.

These emerging sustainability mandates make it imperative for manufacturers to measure and manage their CO2e efforts effectively. Steps that manufacturers are taking to measure and manage their sustainability efforts include:

Establish a Carbon Emissions Baseline

Because you can’t manage what you can’t measure, manufacturers are adopting the Greenhouse Gas Protocol method to track their carbon emissions throughout the supply chain. The company provides three levels/scopes of CO₂ measurement for manufacturers.

Scope 1 addresses direct emissions from owned or controlled sources, and Scope 2 includes indirect emissions from purchased energy generated, along with the emissions tracked in Scope 1. And Scope 3 – the Corporate Value Chain Standard – includes all upstream and downstream emissions along with emissions tracked in Scope 1 and 2.

Manufacturers typically use product life cycle assessment (LCA) software to collect sustainability information once a design is complete. But this manual process is cumbersome, and sustainability information isn’t integrated into other systems. Want to learn more? Read “How to Use LCAs in the Product Design Process.”

Evaluate Cost vs. Sustainability vs. Manufacturability Tradeoffs

Once there is a baseline for a product’s current carbon footprint, manufacturers can work to reduce CO₂ emissions and meet their other product requirements simultaneously. Teams can analyze tradeoffs among cost, sustainability, and design for manufacturing (DFM), and make decisions accordingly.

Product brands are using aPriori’s Manufacturing Insights Platform to:

• Identify alternative materials to reduce CO₂ emissions, weight, etc.
• Evaluate CO₂ alongside cost to improve sustainability without hurting profitability
• Select alternative manufacturing processes to save electricity, reduce scrap, etc.
• Update product designs (3D CAD) to cut manufacturing times, incorporate alternative materials, etc.
• Establish a comprehensive and customizable environment for granular, traceable, and transparent calculations

5) Keys to Sustainable Manufacturing and ESG Reporting

Companies are using digital transformation (DX) capabilities to incorporate sustainability insights into their strategic planning and manufacturing operations. With a unified view of the product development and manufacturing process, businesses can understand a product’s CO₂  impact during early design phases, and then evaluate opportunities to reduce a product’s carbon footprint. Product design and production teams can simulate design alternatives using different materials and manufacturing processes to meet CO₂ emissions, cost, and performance targets.

Manufacturers with the insights to evaluate cost, sustainability, and manufacturability are well-positioned to capitalize on the market demand for “green” products at an attractive price point. Companies can use the EU Taxonomy to differentiate themselves as sustainable manufacturers – and clearly communicate this advantage to customers, investors, and other constituents.